Question

Complete on Excel

Accrual income versus cash flow for a period Thomas Book Sales, Inc., supplies
textbooks to college and university bookstores. The books are shipped with a proviso
that they must be paid for within 30 days but can be returned for a full refund
credit within 90 days. In 2014, Thomas shipped and billed book titles totaling
$760,000. Collections, net of return credits, during the year totaled $690,000. The
company spent $300,000 acquiring the books that it shipped.
a. Using accrual accounting and the preceding values, show the firm’s net profit for
the past year.
b. Using cash accounting and the preceding values, show the firm’s net cash flow
for the past year.
c. Which of these statements is more useful to the financial manager? Why?

Answer 1

a. Net profit for the entity using accrual accounting is shown below:

Sales revenue	760,000.00
less: costs	(300,000.00)
Net profit	460,000.00

b. Net cash flow fro the entity using cash accounting is shown below:

Cash inflows	690,000.00
less: cash outflows	(300,000.00)
Net cash flow	390,000.00

c. The statement that has been produced using the accrual accounting method is more useful for the financial manager. This is because the accrual method of accounting provides a better and more rational picture of an entity’s profits during an accounting period. The income statement prepared under the accrual method reports all revenues that have actually been earned and all expenses that have actually been incurred, irrespective of the fact whether they have been received or not (in case of revenues) and paid or not (in case of expenses).